"I realise that some of my criticisms may be mistaken; but to refuse to criticize judgements for fear of being mistaken is to abandon criticism altogether... If any of my criticisms are found to be correct, the cause is served; and if any are found to be incorrect the very process of finding out my mistakes must lead to the discovery of the right reasons, or better reasons than I have been able to give, and the cause is served just as well." -Mr. HM Seervai, Preface to the 1st ed., Constitutional Law of India.

Monday, October 17, 2011

On October 14
this year, the Supreme Court decided on an important issue pertaining to
joinder of parties in arbitration, which might be considered as an important
development in Indian arbitration. In this post, we discuss the relevant aspect
of the decision dealing with joinder of parties.

PR Shah, Shares
& Stock Broker (P) Ltd (“PR Shah”) and BHH Securities (P) Ltd (“BHH”) were
members of the Bombay Stock Exchange (the SC refers to the
stock exchange as “Mumbai” stock exchange, which is inaccurate). BHH invoked
arbitration against PR Shah and the second respondent, Continental Securities
(P.) Ltd (“Continental”). According to BHH, PR Shah and Continental were sister
concerns with a common director. The said common director had approached BHH for
certain shares-related transactions. A deal was reached and a few share related
transactions were carried out. Since amounts were due to BHH in respect of the
transactions, BHH asked PR Shah and Continental to clear the dues. The Bills in
respect of the amounts due were raised against Continental as required by PR
Shah but with an assurance from the common director that both PR Shah and
Continental were jointly and severally liable. On failure of Continental and PR
Shah to pay despite several requests from BHH, BHH invoked arbitration against
both companies.

In the
arbitration proceedings, a total of Rs. 36,98,384.3 was claimed as the total
sum due alongwith interest. PR Shah and Continental objected to the claim on
common grounds. PR Shah alleged that BHH had raised the claims in the
arbitration proceedings based on forged documents. Further, As regards joinder,
the following contentions were made on behalf of Continental and PR Shah:

a) There was no
arbitration agreement between the BHH and PR Shah.

b) the reference
was bad for misjoinder of parties and of causes of action.

c) PR Shah was a
member of the Stock Exchange while Continental was not. Since the Stock
Exchange had different rules for resolving disputes between members on the one
hand and a member and a non-member on the other.

Two members of
the arbitral tribunal, consisting of Mr. Hemant V Shah and Mr. Sharad Dalal, held
that Continental was liable to pay BHH and in case of failure by Continental,
PR Shah was liable to pay BHH . However, one of the members of the tribunal,
Justice DB Deshpande, agreed with the view of the majority that the claim of
BHH against Continental was valid but disagreed that the tribunal did not have
jurisdiction to decide disputes between BHH and PR Shah. PR Shah petitioned the
court under Section 34 of the Arbitration and Conciliation Act, 1996, where one
of the chief contentions of PR Shah was that Bye-Law No. 248 did not deal with
disputes between two members of the Stock Exchange. (Bye-Law 282 deals with
disputes between members of the stock exchange)

Bye-Law No. 248,
as it was then, reads:

"All claims
(whether admitted or not) difference and disputes between a member and a
non-member (the terms non-member and non-members shall include a remisler,
authorised clerk, a sub-broker who is registered with SEBI as affiliated with
that member or employee or any other person with whom the member shares
brokerage) arising out of or in relation to dealings, transactions and
contracts made subject to the Rules, Bye-laws and Regulations of the Exchange
or with reference to anything incidental thereto or in pursuance thereof
or relating to their construction, fulfilment or validity or in relation to the
rights, obligations and liabilities of remislers, authorised clerks,
sub-brokers, constituents, employees or any other persons with whom the member
shares brokerage in relation to such dealings, transactions and contracts shall
be referred to and decided by arbitration as provided in the Rules, Bye-laws
and Regulations of the Exchange." (emphasis supplied)

The Single Judge
rejected the Petitioner’s (PR Shah) contention and held that if the dispute
between a member and a non-member in an incidental or connected claim cannot be
referred to arbitration under Bye-law 248, the Claimant would have to approach
two tribunals for a single claim, which might lead to “multiplicity of findings” . Therefore, the
Single Judge held:

“[A} claim against the member can be
entertained under By-law 248 where the said claim is incidental to or connected
to a claim against a non-member.”

Consequently,
the Single Judge ruled in BHH’s favour. On appeal, the Division Bench of the
High Court held that if it is
ruled that disputes between a member on the one hand and a member and a non-member
on the other are to be split and heard separately under Bye-Law 248 and 282,
then disputes in which a member and a non-member are liable jointly and
severally cannot be heard. Further, if the claimant is asked to approach multiple
fora, it might lead to inconsistent decisions on the same set of facts. To
prevent such a situation, the Division Bench dismissed PR Shah’s plea.

On, appeal the
Supreme Court dismissed the appeal filed by PR Shah. Following is a summary of
the reasoning:

1) The
arbitration is not an ad hoc
arbitration held as per an arbitration agreement but is an institutional
arbitration. There is no need of a separate arbitration agreement. Even
questions as to the validity of the transaction, bargain, contract or dealing
were arbitrable.

2) The Bye-law
provided for appeal from a decision of the tribunal constituted to resolve
disputes between two members. PR shah contends that such a right was denied to
it by the tribunal by joinder of BHH’s claim against it with its claims against
Continental.

3) “If A had a
claim against B and C, and there was an arbitration agreement between A and B
but there was no arbitration agreement between A and C, it might not be
possible to have a joint arbitration against B and C. A cannot make a claim
against C in an arbitration against B, on the ground that the claim was being
made jointly against B and C, as C was not a party to the arbitration
agreement.”

4) But “if A had a claim against B and C and if A
had an arbitration agreement with B and A also had a separate arbitration
agreement with C, there is no reason why A cannot have a joint arbitration
against B & C.”

5) If two different
arbitration proceedings are held for the same claim, it might lead to
multiplicity of proceedings and conflicting decisions. Therefore, if:

“A has a claim jointly against B and C, and
when there are provisions for arbitration in respect of both B and C, there can
be a single arbitration.”

6) In the instant
case, since Bye-Law 248 provides for arbitration between a member and a
non-member and Bye-law 282 provides for arbitration between members, there can
be a single arbitration.

Comment:

Thus, the decision not only provides that in case of arbitration under the Bye-Laws, arbitration could be invoked against a member and a non-member; it does not merely provide that such claim against the member should be incidental; it also provides that notwithstanding the nature of the claim, if the Claimant is claiming jointly against two parties, there can be single arbitration for deciding the joint claim if there is an arbitration agreement between A and C and between A and B. The purpose of quoting portions of the judgement at points 3, 4 and 5 in the above summary is to highlight this aspect.

(Added after Posting: Although the decision might prevent inefficiency by eliminating the possibility of different proceedings for the same claim, there are a few questions left unanswered by the court. The future courts applying this judgement must take due care in answering those questions. Some of such questions are: (1) how would the arbitral tribunal be constituted in case of such arbitration? (2) how would the cost be apportioned between the parties? (3) whether an agreement prohibiting consolidation of arbitration would be valid? (4) whether consolidation of arbitration proceedings contemplating different arbitral seats is valid?)

Thanks for the comments Mathews. If there is a conflict in the arbitration agreements as to the Applicable Laws, single arbitration is not feasible. The test is whether the difference in agreements would complicate the consolidation. The idea of consolidation is to simplify. Asking the tribunal to decide based on two substantive laws of contract in one arbitration proceedings would make the consolidated proceedings complicated. Same goes with different governing law of arbitration as well.